In the last week of May, real estate investment trusts – or REITs – began a multi-week correction that saw average share prices fall about 15 percent. Was this a sign of something bigger or just a bump in the road? We believe that it was just a bump in the road and we are maintaining our clients positions in individual REITs as well as REIT exchange-traded funds.

One way to gauge the state of REITs as a whole is to look at index-based ETFs that invest in REITs. Doing so will give one a sense of how REITs are doing as an asset class. Our firm uses the iShares Cohen & Steers REIT ETF (NYSE:ICF) and the Vanguard REIT ETF (NYSE:VNQ) for clients. These two ETFs are fairly large and liquid.

A long-term chart – say, 8 to 10 years – will of course show a run-up in the middle of the last decade. Then, one will see the real estate correction in 2007. Then, one will see REITs participation in the 2008/2009 downturn. But, “zooming out” to estimate a long-term trend line, one can pencil something in. Alternatively, if one is mathematically inclined, one can perform a linear regression. Whichever method one uses, it appears that the long-term average price return for REITs as a whole averaged about 5.75% per year. To this, one would add an annual dividend rate of about 3%. So, the annualized total return would seem to be about 8.75% per year.

The long-term picture of REITs seems to provide a reasonable return expectation. The key would be to avoid the kind of events characterized by the 2007 and 2008/2009 events. As for the 2007 event, it was in reaction to the sustained run-up/bubble created in the first half of the last decade. In the four years prior to the 2007 event, REITs had advanced by about 150%. While no one could be certain WHEN a correction would occur, everyone could be certain THAT a correction would occur. On the other hand, the 2008/2009 event was not really related to REITs specifically but in reaction to the financial/credit crisis.

Turning to the correction in REITs that began several weeks ago, we see both REIT-specific reasons and broader reasons for the correction. From November 2012 to May 2013, REITs advanced by 15%. Of course, such an advance is nowhere near the scale of the advance a decade ago. But, on a smaller scale, it might be that the market believed REITs moved ahead of their fundamentals. Irrespective of the specific reason, this correction is very much in line with any other correction in any other asset class that we might see in any given year. It is unremarkable.

That being said, other than domestic equities, most other asset classes have been in some form of correction over the past several months. International equities have struggled; emerging market equities had been down by around 20%. Natural resources have been under pressure. And, of course, bonds have been hammered. Is this going to be another 2008/2009 event? We don’t think so. While the fundamentals of the economy are tepid as best, we don’t see the same kind of indicators surfacing. We don’t see consumer spending drying up as it did in 2008/2009; in fact, recent numbers have seen a little pick up. We don’t see unemployment moving up as it did in 2008/2009; in fact, weekly claims for initial unemployment benefits have been at a non-recessionary level. We don’t see corporate earnings getting hammered as they did in 2008/2009; in fact, S&P 500 earnings are at an all time high.

In the end, we see REITs as having gone through a typical, run-of-the-mill correction . . . a bump in the road.